Customer Service zAttacking the total cost of the relationship zCosts of Purchasing zCosts of Receiving zCosts of Ownership

Costs of Purchasing zTechnical assistance in identifying the right product zClerical assistance in reducing the cost of the transaction zFinancing Assistance zTransportation Assistance

Costs of Receiving zAdvanced shipping notices zScheduled arrival zPackaging

Costs of Ownership zMaintenance zUpgrades zAssociated services

Being in stock zInventory availability zShipping frequency zOrder cycle time zFill rates: The % of time orders (line items) are filled as the customer requested

Service Level and Inventory Time Inventory Reorder Point Lead Time Lead Time Demand Order Quantity

Service Level and Inventory Time Inventory Reorder Point Safety Stock Average Leadtime Demand

Inventory and Service Level zAverage Inventory Level is y1/2 the Order Quantity plus yThe Safety Stock zThe Safety Stock is yRelated to the service level or probability leadtime demand does not exceed on hand stock. yAmount of stock you need to provide desired protection against variation in leadtime demand

Typical Model Z Probability Leadtime Demand is smaller than z Probability Leadtime Demand is larger than z

Borden Foods Box 4.4 page 98 zBelieve a 1% change in service level would lead to a 0.1% change in sales volume z$0.55 Trading Margin (Revenue - Direct Costs) zStd. Cost/Case: $5.38 zAnnual Sales Volume: 59,904 cases zWeekly Sales Volume: 1,152 cases zStd. Deviation: 350 cases zInventory Carrying Cost: 25% of Std Cost

Profit Calculation zProfit = Revenue - Cost zProfit = yGross Revenue y- Cost of Goods y- Inventory Cost zGross Revenue - Cost of Goods = yTrading Margin * Sales Volume y$0.55 * Sales Volume

Profit Calculation zProfit y$0.55 * Sales Volume - Inventory Cost zInventory Cost y25% of Std Cost * Inventory Volume y0.25 * $5.38/case = $1.345/case yInventory Volume = xOrder Quantity/2 + xSafety Stock

Profit Calculation zProfit y$0.55 * Sales Volume - y$1.345 * (Order Quantity/2 + Safety Stock) zHow does Profit depend on Service Level?

Service Level zSales Volume y“A 0.1% change in the [Sales Volume] … for each 1% change in the service level” ySales Volume = ( *  ) * 59,904 cases y  is the change (in %) in the service level zSafety Stock yStd Deviation * Normalized z(.99+  /100)

Typical Model Current Safety Stock.99 Probability Leadtime Demand is smaller than Current Safety Stock.01 Probability Leadtime Demand is larger than Current Safety Stock

Typical Model Current Safety Stock.99 Probability Leadtime Demand is smaller than Current Safety Stock.01 Probability Leadtime Demand is larger than Current Safety Stock  New Safety Stock New Service Level?

Optimum Service Level zWhere incremental savings in Safety Stock balance incremental losses in Sales Volume zWhat makes this difficult? zRelationship between Service Level and Sales Volume (WAG) zRelationship between Service Level and Safety Stock (Normal Approximation)

The Balance zImpact of Changes in Sales Volume y$0.55*0.001*59,904*(  +d) = $32.95*(  +d) yIncremental effect is always $32.95 per 1% zImpact of Changes in Safety Stock y$1.345*Incremental Change in Safety Stock y$1.345*Std Dev. * Change in Normalized z zHave to work to get yChange in Normalized z with Change in Service Level (Look it up)

Using Excel

The Formulas

Finding the new Service Level Why is the incremental Safety Stock Impact decreasing? Why didn’t we do this in terms of Safety Stock?

Was this meaningful? zInventory Effect yReduced Inventory by about cases ySaved about $400-$450 in carrying cost zSales Volume Effect yReduced Sales Volume by cases yLost $200 - $250 in revenue zNet Effect: Approximately $200 per year

Customer Service zPreparing for Contingencies zYour contingencies zYour suppliers’ contingencies zYour carriers’ contingencies zYour customers’ contingencies zYour competitors’ contingencies